The Strategist

Buffett's favorite indicator hits all-time high

02/15/2021 - 03:02

Buffett's favourite indicator, which predicted the collapse of the dot-com bubble, has surpassed its peak in the early 2000s and set a new high. The indicator recently surpassed 200 per cent, the point at which investors are, in Buffett's words, already "playing with fire".

Fortune Live Media via flickr
Fortune Live Media via flickr
The so-called Buffett indicator, which the founder of Berkshire Hathaway Warren Buffett called the best indicator to measure the market, updated the historic high, exceeding the peak of the "dot-com era", writes Bloomberg. Its record high indicates that the market is "highly overvalued", said analysts at the blog Current Market Valuation, cited by the agency.

"The Buffett Indicator is calculated as the ratio of the total market value of the US stock market to the country's GDP. Buffett called it the "best and only" indicator of market value at any given time. 

"If as a percentage this ratio falls to is 70% or 80% level, it is likely that buying a stock now will turn out to be a good deal. If the ratio is approaching 200% - as it was in 1999 and partly in 2000 - then you are playing with fire," the investor described in an article for Fortune in 2001. Buffett pointed out that the indicator peaked just months before the dot-com crash. "It's a very strong warning signal," the billionaire stressed.

The indicator has been trending up over the past decade since the previous global crisis and in 2019 surpassed the peak of the 2001 dot-com bubble for the first time, Bloomberg notes. But it has recently set a new high as US stock market capitalisation has more than doubled the level of estimated US GDP for the current quarter. On February 4, according to Current Market Valuation, the Buffett Indicator reached 224%.